3M 2009 Annual Report Download - page 82

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of December 31, 2009, the IRS has not proposed any significant adjustments to the Company’s tax positions for
which the Company is not adequately reserved. Payments relating to any proposed assessments arising from the
2005 through 2009 audits may not be made until a final agreement is reached between the Company and the IRS on
such assessments or upon a final resolution resulting from the administrative appeals process or judicial action. In
addition to the U.S. federal examination, there is also limited audit activity in several U.S. state and foreign
jurisdictions.
3M anticipates changes to the Company’s uncertain tax positions due to the closing of the various audit years
mentioned above. Currently, the Company is not able to reasonably estimate the amount by which the liability for
unrecognized tax benefits will increase or decrease during the next 12 months as a result of the ongoing income tax
authority examinations.
The Company adopted the new guidance relating to accounting for uncertainty in income taxes, in accordance with
ASC 740, Income Taxes, on January 1, 2007. Upon adoption, the Company recognized an immaterial increase in the
liability for unrecognized tax benefits, which was accounted for as a reduction to the January 1, 2007, balance of
retained earnings. A reconciliation of the beginning and ending amount of gross unrecognized tax benefits (UTB) is
as follows:
Federal, State and Foreign Tax
(Millions) 2009 2008 2007
Gross UTB Balance at January 1................................................... $ 557 $ 680 $ 691
Additions based on tax positions related to the current year ......... 121 126 79
Additions for tax positions of prior years ........................................ 164 98 143
Reductions for tax positions of prior years..................................... (177) (180) (189)
Settlements ....................................................................................
—
(101) (24)
Reductions due to lapse of applicable statute of limitations .......... (47) (66) (20)
Gross UTB Balance at December 31............................................. $ 618 $ 557 $ 680
Net UTB impacting the effective tax rate at December 31............. $ 425 $ 334 $ 334
The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate by $425 million
as of December 31, 2009, and $334 million as of both December 31, 2008 and December 31, 2007. The ending net
UTB results from adjusting the gross balance for items such as Federal, State, and non-U.S. deferred items, interest
and penalties, and deductible taxes. The net UTB is included as components of Other Current Assets, Other Assets,
and Other Liabilities within the Consolidated Balance Sheet.
The Company recognizes interest and penalties accrued related to unrecognized tax benefits in tax expense. The
Company recognized in the consolidated statement of income on a gross basis approximately $6 million, $8 million,
and $9 million of expense in 2009, 2008, and 2007, respectively. At December 31, 2009 and December 31, 2008,
accrued interest and penalties in the consolidated balance sheet on a gross basis were $53 million and $47 million,
respectively. Included in these interest and penalty amounts are interest and penalties related to tax positions for
which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such
deductibility. Because of the impact of deferred tax accounting, other than interest and penalties, the disallowance of
the shorter deductibility period would not affect the annual effective tax rate but would accelerate the payment of
cash to the taxing authority to an earlier period.
The Company made discretionary contributions to its U.S. qualified pension plan of $710 million in 2009, $200 million
in 2008, and $200 million in 2007. In addition, the Company made contributions to its international pension plans of
$504 million in 2009, $186 million in 2008, and $151 million in 2007. The current income tax provision includes a
benefit for the pension contributions; the deferred tax provision includes a cost for the related temporary difference.
As a result of certain employment commitments and capital investments made by 3M, income from manufacturing
activities in Taiwan, China, Brazil, Korea, and Singapore is subject to reduced tax rates or, in some cases, is exempt
from tax for years through 2011, 2012, 2013, 2014, and 2023, respectively. The income tax benefits attributable to
the tax status of these subsidiaries are estimated to be $50 million (7 cents per diluted share) in 2009, $44 million (6
cents per diluted share) in 2008, and $47 million (6 cents per diluted share) in 2007.